Andre Schulten
Chief Financial Officer at Procter & Gamble
Good morning, everyone. Joining me on the call today are Jon Moeller, President and Chief Executive Officer; and Jon Chevalier, Senior Vice President, Investor Relations. We're going to keep our prepared remarks brief and then turn straight to your questions.
Q2 was a strong quarter. Very strong top line growth. Sequential earnings progress in the face of significant cost headwinds. Continued strong cash flow activity. Our progress enables us to confirm fiscal year EPS guidance while increasing our estimates for top line growth, cash productivity, and cash return to shareowners.
Organic sales grew more than 6%. Volume contributed 3 points of sales growth, pricing added 3 points as September/October price increases flow-through, and as year-over-year comparison normalize, mix was neutral for the quarter. These strong company results are grounded in broad-based category and geographic strength.
Each of the 10 product categories grew or held organic sales in the quarter. Personal Health Care grew 20%. Fabric Care and Feminine Care were up double digits. Baby Care up high-singles. Grooming grew mid-singles. Home Care, Oral Care, Hair Care, and Skin and Personal Care each grew low-single digits. Family Care organic sales were in line with prior-year.
Focused markets grew 6%, and enterprise markets were up 7%. In focus markets, U.S. organic sales were up 9%. Despite 12% growth in the base period on a two-year stack basis, U.S. organic sales are up 21%. Europe focused markets were up 5%. Greater China organic sales were in line with prior year against a strong 12% base period comp and due to slower market growth in the quarter. In addition, we took proactive steps in the quarter to encourage our network of distributors to reduce inventory levels to reflect short term consumer demand softness in the market.
Latin America led the growth in enterprise markets, up 15%. Global aggregate market share increased 60 basis points. Thirty-eight of our top 50 category country combinations held or grew share for the quarter. Our priority strategy continues to drive strong market growth and in turn share growth for P&G.
All channel market value in the U.S. categories in which we compete grew nearly 3.5% this quarter. P&G value share continued to grow, up nearly 1.5 points versus same quarter last year, now at 34%. Importantly, the share growth is broad-based. Nine of 10 product categories grew share over the past three, six, and 12-month periods in the U.S.
Consumers continue to prefer P&G brands and the superior performance they provide, even as inflation is impacting household budgets.
On the bottom line, core earnings per share were $1.66, up 1% versus the prior year. On a currency-neutral basis, core EPS increased 2%. Core gross margin decreased 400 basis points, and currency-neutral core gross margin was down 410 basis points. Higher commodity and freight cost impacts combined were a 460 basis point hit to gross margins. Mix was a 140 basis point headwind mainly from product mix impacts. Productivity savings and pricing each provided partial offsets to the gross margin headwinds.
Within SG&A, advertising spending increased versus prior year as we continue to invest to communicate the superiority of our brands. However, overall marketing expense as a percentage of sales decreased 80 basis points driven by sales leverage and savings in non-working marketing costs.
Core operating margin decreased 250 basis points. Currency-neutral core operating margin declined 240 basis points. Activity improvements were a 150 basis point help to the quarter. Free cash flow productivity was 106%.
We returned nearly $7 billion of cash to shareowners, approximately $2.2 billion in dividends and $4.8 billion in share repurchase.
In summary, while input costs and supply chains remain challenging, we delivered good results for the second quarter and for the first half of the fiscal year, keeping us on-track to deliver our going-in earnings estimates and to raise estimates for sales, cash productivity, and cash return to shareowners, which I'll come back to later.
Moving on to strategy. Our team continues to operate with excellence and stays focused on the near-term priorities and long term strategies that enabled us to create strong momentum prior to the COVID crisis and to make our business even stronger since the crisis began. We continue to step forward into the challenges and to double down our efforts to delight consumers.
As we continue to manage through this crisis, we remain focused on the three priorities that have been guiding our near-term actions and choices. First is ensuring the health and safety of our P&G colleagues around the world. Second, maximizing the availability of our products to help people and their families with their cleaning, health, and hygiene needs. Third priority, supporting the communities, relief agencies, and people who are on the front lines of this global pandemic.
The strategic choices we've made are the foundation for balanced top and bottom line growth and value creation, a portfolio of daily-use products, many providing cleaning, health, and hygiene benefits in categories where performance plays a significant role in brand choice. In these performance-driven categories, we've raised the bar on all aspects of superiority, product, package, brand communication, retail execution, and value. Superior offerings delivered with superior execution drive market growth in our categories. This drives value creation for our retail partners and builds market share for P&G brands.
The superiority model works in each of our categories. Take the three category growth drivers this quarter: Personal Health Care, Fabric Care, and Feminine Care. Very different categories, different competitors, different geographic footprints, and different materials and manufacturing processes, each delivering superiority and each growing organic sales double digits. In each of these categories, P&G is driving a disproportionate share of overall category value growth, growing the pie for all participants.
We've made investments to strengthen the health and competitiveness of our brands across innovation, supply chains, and brand equity, and we'll continue to invest to extend our margin of advantage and quality of execution, improving solutions for consumers around the world.
Building on the strength of our brands, we are thoughtfully executing tailored price increases. We closed couple price increases with innovation to improve consumer value along the way. The strategic need for investment to continue to strength the superiority of our brands, the short term need to manage through this challenging cost environment, and the ongoing need to drive balanced top and bottom line growth, including margin expansion underscore the importance of ongoing productivity.
We're committed to driving cost savings and cash productivity in all facets of our business. No area of cost is left untouched. Each business is driving productivity within their P&L and balance sheet to support balanced top and bottom line growth and strong cash generation.
Success in our highly competitive industry requires agility that comes with the mindset of constructive disruption, a willingness to change, adapt, and create new trends and technologies that will shape our industry in the future. In the current environment, that agility and constructive disruption mindset are even more important.
Our organizational structure yields a more empowered, agile, and accountable organization with little overlap or redundancy, flowing to new demands, seamlessly supporting each other to deliver against our priorities around the world. These strategic choices of portfolio superiority, productivity, constructive disruption, and organization structure and culture are not independent strategies. They reinforce and build on each other. When executed well, they grow markets, which in turn grows shares, sales, and profit. These strategies were delivering strong results before the crisis, have served us well during these volatile times, and we're confident they remain the right strategic framework as we move through and beyond the crisis.
Moving on to guidance. We said last quarter that we would undoubtedly experience more volatility as we move through the fiscal year. The Omicron variant has certainly proven this to be correct. As we saw in the first half of the fiscal year, growth results going forward will be heavily influenced by base period effect along with these realities of current year post pressures, foreign-exchange volatility, and the continued effect of the global pandemic on supply chains and consumer behavior.
Transportation and labor markets remain tight. Availability of materials remain stretched. In some categories and in some markets, inflationary pressures are broad-based with little sign of near-term relief. These cost and operational challenges are not unique to P&G, and we won't be immune to the impacts. However, we think the strategies we've chosen, the investments we've made, and the focus on executional excellence have positioned us well to manage through this volatility over time.
The recent spike in virus cases and resulting lockdowns increase the risk of additional work stoppages in our operations or in those of our suppliers. Based on current spot prices, we now estimate a $2.3 billion after-tax commodity cost headwind in fiscal 2022.
Since our last update, we've seen continued increases in diesel and chemicals with little offset in other materials. Freight costs have continued to increase. We now expect freight and transportation costs to be an incremental $300 million after-tax headwind for fiscal 2022.
Foreign exchange rate have also moved against us since our last guidance. We now expect FX to be a $200 million after tax headwind to earnings for the fiscal year. We will offset a portion of these cost pressures with price increases and with productivity savings. We've now announced price increases in each of our 10 product categories in the U.S., increases in Baby Care, Feminine Care, Adult Incontinence, Family Care, Home Care, Hair Care, Grooming, Oral Care, Skincare are now effective in market.
We also increased prices on mid-tier liquid detergents and powder detergents over the last few months. In mid-December we announced to retailers that effective February 28 we are increasing pricing on the balance of our Fabric Care portfolio. This includes Tide, Gain, Downy, Bounce, and Unstopables and includes all forms: liquid and unit-dose detergents, scent beads, liquid fabric softeners, and dryer sheets.
Just yesterday, we announced to retailers that we are increasing pricing on certain Personal Health Care brands in the U.S. effective mid-April. The degree and timing of these moves are very specific to the category, brand, and sometimes the product form within a brand. This is not a one-size-fits-all approach.
We're also taking pricing in many markets outside the U.S. to offset commodity, freight, and foreign-exchange impacts. As we've said before, we believe this is a temporary bottom line rough patch to grow through, not a reason to reduce investment in the business. We're sticking with the strategy that has been working well before and during the COVID crisis.
Moving to the key metric guidance. We now expect organic sales growth in the range of 4% to 5% for the fiscal year, up from our initial range of 2% to 4%. We expect pricing to be a larger contributor to sales growth in the back half of the fiscal year as more of our price increases become effective in the market. As this pricing reaches store shelves, we'll be closely monitoring consumption trends. So far, we haven't seen noticeable changes in consumer behavior. Demand for our best-performing premium-priced offerings remains very strong, as do our market share trends.
On the bottom line, we're confirming our outlook of core earnings per share growth in a range of 3% to 6%. In total, our revised outlook for the impact of materials, freight, and foreign exchange is now a $2.8 billion after-tax headwind for fiscal 2022 earnings or roughly $1.10 per share, a 20-percentage point headwind to core EPS growth. Despite these cost challenges, we are committed to maintaining strong investment in our brands. As pricing goes into effect and as we annualize the initial spike in input cost, earnings growth should be sequentially stronger in the third and fourth quarter of the fiscal.
We are increasing our outlook for adjusted free cash flow productivity to 95%, and we are raising our guidance for cash return to shareowners. We continue to expect to pay over $8 billion in dividends, and we now plan to repurchase $9 billion to $10 billion of common stock, combined a plan to return $17 billion to $18 billion of cash to shareowners this fiscal year. This outlook is based on current market growth rate estimates, commodity price and foreign-exchange rates. Significant additional currency weakness, commodity cost increases, geopolitical disruption, major supply chain disruptions, or store closures are not anticipated within the guidance ranges.
To conclude, our business exhibited strong momentum well before the COVID crisis. We've strengthened our position further during the crisis, and we believe P&G is well positioned to grow beyond the crisis.
We will manage through the near-term cost pressures and continued market-level volatility with the strategy we've outlined many times and against the immediate priorities of ensuring employee health and safety, maximizing availability of our products, and helping society overcome the COVID challenges that still exist in many parts of the world. We'll continue to step forward toward our opportunities and remain fully invested in our business. We remain committed to driving productivity improvements, to fund growth investments, mitigate input cost challenges, and to maintain balanced top and bottom line growth.
With that, we'll be happy to take your questions.
